Tuesday, January 3, 2012

Chasing the large incumbents are the smaller foreign and local players.Most of these players have a much shorter history than the incumbents, and they have accumulated only single-digit market shares over several years. The strategic imperatives for these players depend on whether they are in more mature or nascent markets.

In many of the Asian markets the landgrab phase is over, and, consequendy, smaller foreign and local players are likely to find it much more difficult to expand significantly beyond their current market position in a short period of time. Therefore, they need to choose whether to remain as fringe players with a similar model to the larger players or to find a niche they can dominate and potentially become much more profitable within that niche.Across Asia, life insurance players are not very well differentiated. While the brands may differ in terms of history and recognition, the operating model and the target market are remarkably similar across all players. Most players today focus on the mass-market segment, and sell very similar products.Smaller players can certainly survive in their current form for some time. Market growth is strong and there is still little pressure for consolidation. In fact, there seems to be relatively few scale benefits for the large players, and most of the smaller players have been able to enjoy healthy margins without experiencing the disadvantages arising their from their smaller size. With the largest players typically saddled with historical legacies and aging sales forces, there is little urgency for smaller players to change their business model radically. For these reasons, consolidation has not yet happened in these markets.In fact, given their more nimble starting point, smaller players are better situated to capture the growth potential from these markets. The opportunity to create a differentiated branding and business model is large. Life Insurance Companies In AsiaIn mature markets, such as Japan, South Korea, and Taiwan, where customers are becoming more sophisticated and the competitors are well established, the niche for smaller companies is likely to be in distribution for example, targeting high-touch, high-margin customers or innovating the operating model to deliver low-premium, low-margin products to the mass segment.This is already evident in the more mature markets of South Korea and Japan where there is a growing proliferation of smaller, but highly successful, niche players. This includes ALICO's direct-channel strategy in Japan that mobilizes corporate agents to sell medical insurance, and ORIX Life's low-premium strategy, which uses the mail-order channel for low-margin policies. ALICO's market share jumped from 1 percent in 2000 to 4.8 percent in 2007.Most of these strategies involve pursuing niche distribution channels and developing different business models. This means acquiring different types of staff for specialized sales channels or focusing on niche products. As explained previously, Mirae Asset Life in South Korea was the first insurer to combine an insurance sales force with a deep focus on premium, asset-management products. Part of the strategy was to develop mini-retail investment centers in convenient locations alongside a roaming sales force that would bring potential clients to these centers for sal meetings. By the end of 2006, Mirae had established 47 so called "Financial Plazas" in convenient, middle-class locations throughout South Korea. Already, around 11 percent of Mirae Asset Group's mutual fund sales are through Mirae Asset Life, as compared to the industry average of less than 3 percent.Meanwhile, ING in South Korea provides an example of a player attacking the incumbents' housewife-dominated sales forces with agents who mostly male, younger, and better educated and thus able to target a different customer base. And in Japan, Sompo Life successfully markets basic life insurance products using non-face-to-face methods. Its core product is a one year, term-life insurance, which allows customers to review their insurance needs according to their life stage by adding riders for various types of cover, such as hospitalization, cancer, and income replacement insurance.There are also the product specialists. For example, The Hartford, in Japan, concentrates solely on variable annuities and manages 22 percent of the total in-force sum assured, as of financial year 2006. Indeed it can be said that The Hartford created this market. Life Insurance Companies In AsiaIn less mature markets, the strategy for the smaller players can be quite different. In these markets, such as India and China, but also some of the Southeast Asian markets such as Vietnam or Indonesia, there is much more room for smaller players to participate in the natural growth of the market. These markets are still in landgrab mode, where the penetration of insurance to gross domestic product (GDP) is still low (2 percent in China and 4.3 percent in India). For smaller players in these markets, the business model need not necessarily be different from the large incumbents; instead, the focus should be on execution excellence and the development of a stronger management bench. Choosing the right channel mix and geographic focus is also important, as it is not feasible to expand nationwide without the proper management resources and for some foreign players, the proper licenses.

Execution excellence is key for the smaller players to succeed in these markets. But this is no small thing to achieve. Many of the smaller players in markets such as China and India have grown at breathtaking rates.They often struggle with a lack of management talent, poor operations, and a lack of control over highly entrepreneurial branch operations. For most of these smaller players, their ambitions should be outgrowing and outexecuting the large incumbents by a significant percentage. This is particularly true when they compete away from the more developed cities and drive deep into the hundreds of emerging second- and third-tier cities, where brand leadership is still wide open. But we believe few of the smaller companies will be able to achieve this - the operational challenges are enormous, even though they are at a smaller scale, and management talent is even harder to attract for these companies. Therefore, focus is a key success factor for these smaller attackers. Too often we have seen companies fail because they tried to do everything - every channel and every geography - at the same time, without the proper management bench, operations, and IT support in place.Looking at the development of the past decade, there is no reason not to expect a handful of these smaller players to become large, dominant players over the next 10 years, especially in the rapidly growing markets. Leading players in China and India have built their current strong market position within the last 5-10 years. For example, ICICI-Prudential in India has grown its position only in the past few years. For some of today's smaller life insurers, dominance may come from a niche segment, either in terms of customers, distribution models, or products. But we also anticipate that many of the smaller players will struggle with their existing small and undifferentiated operating models.

These players might be able to defend their current market share, and will even enjoy the natural growth of these markets for some years. They will probably still be quite profitable, and many will not see the urgency to change the way they operate and experiment with new initiatives. However, in the dynamic world of Asian life insurance, we see a lost opportunity for them to develop a stronger, more defensible niche and they will eventually come under a lot of pressure from larger and stronger players - they will be the first victims of a consolidation wave. To learn more, you can check out Life Insurance Companies In Asia.